Self-Custodial Exchange C3 Raises $6M as Markets Spurn Centralized Exchanges

C3 self-custodial DEX completed a $6M seed funding round, led by Two Sigma Ventures. Backers include Jane Street, Hudson River Trading and other traditional quant firms.

“Not your keys, not your coins”. Awareness of true crypto ownership quickly rose after the FTX fallout that further triggered a series of bankruptcies and a bank run on centralized exchanges (CEXs). In response to growing concerns over insolvency, major centralized exchanges such as Binance quickly disclosed proof-of-reserves, though the credibility of some of these reports was limited.

In turn, the case for self-custody and decentralized exchanges grows stronger. Noticing this rising demand, key industry players are increasingly working to eliminate barriers associated with decentralized finance (DeFi) through improved user experience.

Against this backdrop, C3, a self-custodial DEX, on February 10 announced a $6 million seed funding round led by Two Sigma Ventures, the venture capital arm of the hedge fund Two Sigma Investments. 

The DEX aims to offer an easy-to-use interface that CEX users would find familiar, while allowing customers to keep their funds in non-custodial crypto wallets or use another financial custodian of their choosing, such as Fireblocks.

As an alternative to crypto wallets, which require users to safeguard and remember a private key, the startup also offers users a traditional email login to access funds.

“For many years, we saw the bundling of many services (e.g., custody, settlement, lending, etc.) into a handful of centralized intermediaries. In the years to come, we believe the crypto market structure will begin to look like many TradFi analogs, in that customer’s funds will sit in siloes where the owners prefer, and critical market functions will be segregated across many separate providers,” said Andy Kangpan, principal at Two Sigma Ventures in the press release.

The fundraising highlights the growth trend among decentralized protocols as well as resources dedicated to them. However, the ability to cater to demand for self-custody seems not to be the only driver for increased appetite for DeFi. 

Last week, when the Securities and Exchange Commission slapped Kraken, the centralized exchange, with two charges related to its staking programs, its decentralized staking 

counterparts such as Lido Finance and Rocket Pool appeared to have benefitted from it. According to CoinTelegraph’s report, investors are betting on increased platform usage, leading to the notably higher token price of Lido’s LDO and Rocket Pool’s RPL.

Going forward, intensifying crypto regulatory actions against CEXs may not necessarily be a bad thing. In cases where CEXs fail to comply with regulations and/or decide to tap out, it may drive users to opt for safer centralized options or DeFi. The latter requires better understanding of the underlying technologies, which will ultimately help users better exercise caution over their own funds.

Yet, despite knowing the major flaws of CEXs, many users continue to favor them given their more user-friendly experience (evidenced by the dominance of CEXs), for example still using the platform for staking, even though they have considerably less control over their funds and little transparency into how returns are calculated. Similarly, the users may not adopt DEXs and self-custody crypto wallets due to the steep learning curve, at least until they become a necessity.

Meanwhile DeFi, which is defined by its autonomous characteristics, may demonstrate higher resistance to immediate regulation. As a result, those who turn to DeFi as an alternative should aim to improve their understanding of how crypto works on the technical side. Regulation coupled with improved DeFi infrastructure, such as easy-to-use interfaces and self-custodial solutions, may eventually promote the healthy growth of the DeFi ecosystem and community, absorbing some market share from CEX.

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